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April 1, 2000

Godfather of SOES Blasts Senate Investigation

By William Hoffman

Also in this article

  • Godfather of SOES Blasts Senate Investigation
  • Page 2

Given the provocative title of the Senatehearing - Day Trading: Everyone Gambles But the House - perhaps Harvey I. Houtkin's reaction is not surprising.

"It wasn't an investigation," said the crusty chief executive of All-Tech Direct, a day trading firm based in Montvale, N.J. "It was a crucifixion."

The two-day hearing in late February alternated between emotional recollections of last year's shooting rampage by distraught Atlanta day trader Mark Barton, and emotional rebuttals by Houtkin and other day trading firm executives.

It was leavened by testimony from the Securities and Exchange Commission. The lawmakers heard testimony from the SEC documenting alleged abuses by day trading firms, and by the National Association of Securities Dealers Regulation, which detailed pending NASD oversight proposals.

Yet for all the fire exchanged at the Senate Permanent Subcommittee on Investigations, Houtkin, a pioneer of rapid-fire SOES day trading in the last decade, believes the issue is dead.

"The impression I got was, they went through the motions, and it's over," he said.

Heart of Problem

"The problem with all this stuff," explained Saul S. Cohen, a partner at the law firm of Proskauer Rose in New York, and counsel to the Electronic Traders Association, "is that it's not clearly defined as to what advocacy, or new public policy arguments, are aimed at."

Cohen, who did not attend the hearings, compared some of the proposals to rein in day trading abuses to the debate a decade ago over the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. Like RICO, Cohen said, the new day trading controls are meant to be applied against a small group of devil-may-care firms that play fast and loose with the law.

But also like RICO, he said, "When you try to write a laser-like law, it doesn't work that well, because you have equal protection and due process concerns. And when you try to broaden it, you catch a lot of upstanding firms that would not otherwise have run afoul of that law."

Cohen said that day traders break down into two distinct groups. The first group comprises on-site' traders. These are professionals, with years of experience, working alongside other professional traders in high-tech offices. Management closely monitors results to ensure its substantial investment in technology is being recouped, he said.

The second group comprises online' traders, Cohen said. These traders work from their homes, or from remote, satellite offices, using services provided by companies such as Charles Schwab & Co., E*Trade and PriceWaterhouse. Most of the abuses, Cohen contends, occur in the latter settings.

"Regulation that recognizes that day trading should be some kind of profession is fine with ETA," Cohen said. For example, margin lending requirements should be scaled to the amount of security a trader is willing to deposit. The larger the deposit, Cohen said, the more money could be lent on margin, since wealthy traders can afford to lose more of what they borrow. An NASD Regulation proposal reflects this philosophy, he noted.